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High Court of Judicature at Bombay
S.J. VAZIFDAR & A.K. MENON, JJ.
Harinarayan Bajaj
Versus
Madhukar Sheth
Appeal No. 518 of 2004 In Arbitration Petition No. 165 of 2004
Decided on : 04-09-2014
ARBITRATION - JURISDICTION - SUSPENSION OF MEMBERSHIP - EFFECT ON ARBITRATION AGREEMENT - NATURAL JUSTICE - INSPECTION OF DOCUMENTS - AWARD BASED ON EXTRANEOUS MATERIAL - SETTING ASIDE OF AWARD.
Fact of the Case:
The appellant, a client of the respondent, a stockbroker, entered into various transactions in respect of shares listed on the Bombay Stock Exchange (BSE). The respondent invoked arbitration under the rules, byelaws, and regulations of the BSE. The appellant challenged the jurisdiction of the arbitral tribunal on the ground that the respondent's membership of the BSE had been suspended and therefore, he was not entitled to invoke the arbitration agreement. The appellant also contended that he was denied an opportunity to cross-examine the respondent and the arbitral tribunal rejected his application under section 27 of the Arbitration & Conciliation Act, 1996 for inspection of documents.
Finding of the Court:
1. The suspension of a member's membership by the BSE does not affect the rights of the non-member (client) to have the disputes between himself and the suspended or expelled member referred to and decided by arbitration. 2. The arbitral tribunal erred in rejecting the appellant's application under section 27 of the Act without a satisfactory consideration thereof. 3. The award is based essentially, if not solely, on the SEBI enquiry report and on the ground that no authority has set aside the transactions. This is not a valid approach. The Arbitrators were bound to consider themselves whether the transactions were binding between the parties. They abdicated their duty to do so.
Issues: 1. Whether the suspension of a member's membership by the BSE affects the rights of the non-member (client) to have the disputes between himself and the suspended or expelled member referred to and decided by arbitration? 2. Whether the arbitral tribunal erred in rejecting the appellant's application under section 27 of the Act without a satisfactory consideration thereof? 3. Whether the award is based on extraneous material and the arbitrators failed to apply their minds independently?
Ratio Decidendi: 1. The provisions in the rules, bye-laws, and regulations of the BSE relating to arbitration remain unaffected upon a member being suspended or expelled or his membership being terminated. The disputes and differences can be referred to and decided by arbitration as provided in the rules, byelaws, and regulations of the exchange even where a member has been suspended or expelled or where the persons membership has been terminated. 2. The arbitral tribunal is bound to consider the application under section 27 of the Act and afford adequate opportunity to the parties to make their case. However, it cannot permit the use of judicial machinery to go on a fishing expedition so that the possibility of some evidence which would help the Respondent would surface. 3. The award cannot be made only or even primarily on the basis of an enquiry report. The arbitrators are bound to consider themselves whether the transactions were binding between the parties. They cannot abdicate their duty to do so.
Final Decision: The appeal is allowed. The impugned order and judgment is set aside. The Award is set aside. It is however declared and clarified that the arbitration agreement remains unaffected even assuming that the respondents membership was suspended or cancelled and even if the respondent was expelled by the BSE.
S.J. Vazifdar, J.
1. This is an appeal against the order and judgment of the learned single Judge, dismissing the appellant's petition under section 34 of the Arbitration & Conciliation Act, 1996 to set aside an award passed by the arbitral tribunal dated 07.11.2003. The award directed the appellant to pay the respondent a sum of Rs.1,58,39,459-87 but refused to grant interest or costs.
2. The appellant entered into various transactions in respect of shares listed on the Bombay Stock Exchange (BSE). The respondent was one of the appellant's brokers. The parties had entered into a Member–Client Agreement dated 31.08.2000. Clauses 1, 6 and 7 thereof read as under :-
“1. The provisions of this agreement shall always be subjected to government notifications, any rules, regulation and guidelines issued by SEBI and stock exchange rules, regulations and bye laws that may be in force from time to time.
6. All trades, transactions and contracts are subject to the Rules and Regulations of the Exchange including arbitration as per stock exchange rules and shall be deemed to be and shall take effect as wholly made, entered into and to be performed in the city of Mumbai and the parties to such trade shall be deemed to have submitted to the jurisdiction of the Courts in Mumbai for the purpose of giving effect to the provisions of the Rules and Regulations of the Exchange.
7. The client may give orders telephonically, as it suits the client and is convenient to the client, such telephone orders will be executed by the broker at the cost and risk of the client. For safety, the client is advised to send written orders. The client agrees to collect his contracts for the day from Member's office at the end of day before 6:30 p.m. The client also agrees to collect the bill for a settlement within two working days from the end of settlement and will point out objections if any within another two working days, or else the bill/contract will be seemed to be correct and accepted.”
3. The respondent invoked arbitration under the rules, byelaws and regulations of the BSE. The respondent filed a statement of claim seeking the amounts awarded together with interest at 18% and an amount of Rs.2.00 crores as damages. The claim was on the basis of the amount due at the foot of the account maintained by the respondent in respect of the appellant. The parties had entered into purchase, carry forward and sale transactions. On account of the appellant's alleged default, the respondent had also sought to square off certain transactions. The respondent's statement of case contains the following averments. The amounts claimed were in respect of settlement Nos.A-50, A-51 and A-52 towards the appellant's purchases and margin after giving him credit for the amounts deposited by him. The appellant's account was regularized upto statement No.A-49. The prices of the shares dealt in by the appellant crashed resulting in huge pay-in being required by the appellant. The appellant's default resulted in the respondent's default in pay in to the BSE. The appellant's cheques were dishonoured. Proceedings under section 138 of the Negotiable Instruments Act had been filed by the respondent. The respondent relied upon the copies of the appellant's contracts for the period 12.03.2001 to 23.03.2001.
4. In the written statement, the appellant apart from denying the claim, repeatedly contended that the respondent had failed and neglected to give him inspection of particulars and of the documents pertaining to the transactions carried out by the respondent on his behalf. The appellant also stated that he had along with the written statement filed an application under section 27 of the Arbitration & Conciliation Act, 1996 and Regulation 15.7 of the BSE and that he was filing the written statement under protest and craved leave to file a more detailed and specific reply on obtaining inspection of the relevant documents, for which he had made the said application. The appel
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